Entrepreneurs Council Case Study

. Do you detect any problems with the decision-maker?

The decision-maker is often an authority figure within the organization. In this instance, she is the own with a business degree. I do detect problems in her financial acumen. As the case indicates, she is uncertain as to what costs to take into account, her pricing methodology, or how the market will react to a price change. Many of these concerns are warranted given the overall market and competitive behaviors. However, I believe Karen should be more confident in her overall market analysis.

To begin, Karen has a small competitive advantage as her shop is located in a prime location with a captive audience. Her building is located next to a small plaza where customers can easily access her products. In a addition, she is somewhat insulated from the pricing pressures of competitors in the market. As the case indicates, grocery stores tend to sale a generic product that is predicated on price. The taste and quality are both subpar as compared with Karen’s products, which gives her a distinct advantage in the marketplace. This advantage does create a problem for Karen as she is indecisive on her actions. She first, does not properly forecast the input costs of her product due to uncertainty. This is somewhat alarming as Karen can easily hedge the input costs of her product through forward and futures contracts. Although her business is small, Karen is concerned about the future price volatility of commodity prices. This a particular concern given the low interest rate environment and investor willingness to use commodities as a store of wealth, thus bidding the price up. To properly combat this issue Karen should enter into futures and forward contracts to essentially “lock-in” the price of the raw materials of her product (Mari?,, 2009).

Karen also seems to be unsure of the pricing structure of her business which is alarming. According to the case, she is having trouble forecasting both variable and fixed costs in her company. This shows a problem in both business and financial acumen. Karen would be well served hiring a finance and accounting professional to handle these issues for her. By doing so, Karen can free up critical management time for activities that are more connected to her passion of bread making. This would also give her professional expertise to run her business more efficiently. As indicated by the case, bread distributors are very common in Karen’s market. As a result, market saturation and competition are both very high. Karen will need to better differentiate her product in order to properly compete with the financial stable competitors.

Finally, Karen’s business acumen is lacking as compared to her competitors. From the case study, her competitors know their strengths and intend to compete based on them. The grocery stores are competing based on price. The smaller shops are competing based on quality and convivence. Based on the case, it appears Karen is not entirely sure of her competitive position in the marketspace (Suas, 2006).

6. Assess the risks to the business is Karen’s current thinking.

There are numerous risks in Karen’s current thinking. The first and most obvious in the financial risk. As a smaller operation, she does not have the financial resources to withstand a dramatic or precipitous fall in business. She therefore must either be correct in her first assumption or manage her risk in a manner that allows the overall business to survive. The bread business is much more akin to a commodity business. There is very little pricing power in the overall market as businesses compete heavily based on price. The small pricing advantage some firms do achieve is attributable to a large quality gap relative to competitors. From a business perspective Karen must first recognize her competitive advantages relative to peers in the industry.

Additionally, Karen is not properly hedging her input costs to maximize her provides. She is not properly forecasting the input costs associated within her business. Although many of these variables are unknown in the future, Karen has not attempted to hedge the pricing impact on her business. As the case illustrates, all input costs associated with her business have risen for the past 10 years with the exception of yeast. Karen should reasonably expect a continued rise in input prices into the future, even though the degree of these increases is unknown. Inflation over the past decade has averaged roughly 2% a year. Given the continue monetary and fiscal stimulus prevailing in the market today, it is reasonable to assume a continued 2% rise in prices due to inflation. The federal reserve also has a mandate of 2% inflation which further solidifies this assumption. Given this reasoning Karen should anticipate a continued rise in her input costs and must therefore combat this rise with increase bread prices. Karen can also utilize futures and forward contracts to look in large quantities of input costs. By leveraging futures and forward contracts, Karen can significantly diminish the price volatility of her input costs while also being competitive with her peers in the industry. The reduction in volatility also provides Karen with assurances that she will be able to maintain input costs over a long period of time. A sudden change in commodity prices would place Karen in a very precarious position. For one, as a small business owner, she may be unable to absorb the increases in input costs. She also will be unable to pass these price increase onto consumers as cheaper alternatives are available in the market. Finally, a sharp increase in input costs could potentially limit profitability and Karen’s ability to reinvest back into the business. For these reasons Karen should hedge her key input costs in the future to reduce risk to her overall business franchise.

Finally, Karen is not properly accounting for her fixed cost investments. For her business, fixed costs are very important element and should be included in the pricing decision. The primary reason for doing so is that fixed costs are substantial inputs into her business. The property, plant, and equipment must be paid for through sales of her product. Not accounting for them is a mistake especially if they were financed with debt. In this circumstance, Karen must ensure that she is able to service the debt while also maintaining the critical equipment necessary for her bread business. For example, Karen must maintain the machinery, chains, tables, interior spaces, and other equipment. This equipment over time will depreciate and wear out. As these items depreciate, Karen must eventually replace them. This is therefore a critical cost that must be properly accounted for.

7. What risks do you perceive with your recommended business model?

The first risk to the recommended business model is changing consumer sentiments. Here, a change in consumer behavior can have an adverse impact on the business. Unfortunately, the overall bread market has very high consumer power. Consumers can easily switch from one product to the next without any ramifications or switching costs. In addition, consumers have many dining options to choose from which creates a negative element for the overall pricing behavior of the business. Consumers, in the current market are now becoming much more health conscious. A shift towards more healthier options and away from breads could also increase the risk in the overall business (Señorans, 2003)